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Short-Term Energy and Winter Fuels Outlook

Release Date: October 13, 2016  |  Next Release Date: November 8, 2016  |  Full Report    |   Text Only   |   All Tables   |   All Figures

Crude Oil

Prices: Front-month futures prices for Brent and West Texas Intermediate (WTI) crude oil increased toward the end of September and the first week of October, settling at $52.51 per barrel (b) and $50.44/b, respectively, on October 6 (Figure 1). Monthly average spot prices for Brent and WTI increased slightly from August to September.

After an unofficial meeting in Algeria on September 28, members of members of the Organization of the Petroleum Exporting Countries (OPEC) announced a framework agreement that could lead to a cap on OPEC crude oil production around 32.5 to 33.0 million barrels per day (b/d) in 2017. Important details of the agreement, including target outputs for individual countries, still remain to be decided and agreed upon at a regular OPEC meeting in November. Even if such a decision/agreement is actually reached, the extent of compliance with whatever targets are stated remains an important question in light of past experience. Notwithstanding the recent framework agreement, the total OPEC production forecast for 2017 of 33.0 million b/d in the October STEO is almost unchanged from the September forecast.

EIA's October STEO Brent crude oil price forecast for the fourth quarter of 2016 and the first quarter of 2017 is $48/b, about $3/b dollars higher than in the September forecast, reflecting recent price movements and a reduction in near-term downside price risks. However, the forecast for prices toward the end of 2017 has actually been reduced, with prices for 2017 as a whole slightly below the September forecast. The recent activity of U.S. onshore producers, along with expectations of higher U.S. production in 2017, is one of the drivers for lowering EIA's Brent crude oil forecast in the fourth quarter of 2017 to $55/b from a forecast of $58/b in the September STEO.

Figure 1: Historical crude oil front month futures prices

Second-quarter 2016 financial results for 46 publicly traded U.S. onshore oil producers showed improved financial conditions compared with the first quarter (Figure 2). Cash from operations increased from the first quarter to the second quarter of 2016, reflecting higher crude oil prices. Many companies improved operating efficiency, reduced costs, and improved their balance sheets as crude oil prices stabilized. Higher prices also provided the opportunity for these companies to hedge future production at more favorable price levels, with recent price increases likely encouraging additional hedging activity.

Capital expenditures at these companies also rose in the second quarter from the first quarter, the only quarter-over-quarter increase since 2014. Even last year, when higher oil prices in the spring and summer also led to increased cash flow, these companies were still reducing capital expenditures. Rising active rig counts implied renewed drilling across U.S. basins, and several merger and acquisition announcements suggest that some companies were actively expanding investment budgets in the second quarter of this year.

Figure 2: Crude oil front month - 13th month futures price spread

Crude oil supply and inventories: Increased oil production from Libya and Russia, along with the potential for reduced disruptions to Nigeria's production, and a recovery in U.S. crude oil production beginning in mid-2017 are contributing to expections of looser 2017 balances in this STEO compared with last month. In Libya, crude oil production averaged 310,000 b/d in September. However, total crude oil output reached nearly 500,000 b/d at the end of the month, following the suspension of force majeures at a number of the ports that were previosly blocked by militants aligned with the Petroleum Facilities Guard.

In Russia, recent oil production has been higher than previously forecast, with production exceeding previous records in recent months. In addition, the start-up of new fields, including Lukoil's Pyakyakhinskoye field (early September), Filanovsky field (late September), the East Messoyakha (end September), and Rosneft's Suzun (October), has resulted in a higher-than-previously-expected outlook for Russian production. EIA now forecasts Russia's oil production to increase by 190,000 b/d in 2016 and by 20,000 b/d in 2017. Previously, EIA had forecast declining Russian production in 2017.

Disrupted volumes of Nigerian crude oil are set to partially return in October as the loading schedules for Qua Iboe and Forcados crude oil streams indicate about 500,000 b/d of extra supply could return to the market.

Some of the additional crude oil volumes could add supplies to the European market and put some downward pressure on Brent prices for delivery in the coming months. The Brent 1st month-13th month futures prices spread, a measure of contango (when near-term futures prices are at a discount to further-dated futures prices), settled at -$3.70/b on October 6 (Figure 3). The shape of the futures curve is relatively unchanged since September 1, which is somewhat unusual because contango typically narrows when front-month prices are rising.

In contrast to the shape of the Brent futures curve, contango in the WTI futures curve decreased, with the 1st-13th spread settling at -$3.77/b on October 6. Hurricane Hermine disrupted crude oil imports into the Gulf Coast in September, contributing to large inventory declines and likely providing some support to front-month WTI prices.

Figure 3: Historical crude oil differentials

Crude oil demand and inflation expectations: The outlook for global crude oil demand in the October STEO has been revised modestly downward from the September STEO, with global oil demand expected to grow by 1.3 million b/d in both 2016 and 2017. In September, Manufacturing Purchasing Manager Indexes for most major economies around the world indicated expanding manufacturing activity and economies that had contracting manufacturing sectors, such as Brazil, Russia, and Turkey, improved from the prior month. Projections for real oil-weighted GDP growth in non-OECD countries also remained stable at 3.6% for 2017. Despite the recent improvement in macroeconomic indicators, downside risks remain in the oil demand forecast.

U.S. inflation expectations for the next five years, as measured by the difference between yields on Treasury Inflation Protected Securities (TIPS) and five-year treasury bonds, rose to near 1.5% as the U.S. Consumer Price Index (CPI) and the Core CPI (which excludes food and energy costs) for August were both above expectations (Figure 4). Inflation levels and crude oil price are typically positively correlated, because energy and transportation costs can affect prices for a wide range of goods and services. The Federal Open Market Committee (FOMC) met in late September, and, although the FOMC decided not to raise interest rates, market participants are expecting a rate increase in the next few months.

Figure 4: Brent and WTI Net Money Manager Positions

Price Summary
  2014 2015 2016 2017
a West Texas Intermediate.
WTI Crude Oila
(dollars per barrel)
93.17 48.67 42.78 49.99
Brent Crude Oil
(dollars per barrel)
98.89 52.32 43.43 50.99
Global Petroleum and Other Liquids
  2014 2015 2016 2017
a Weighted by oil consumption.
Supply & Consumption (million barrels per day)
Non-OPEC Production 55.90 57.49 56.84 56.94
OECD Consumption 45.86 46.41 46.53 46.60
Non-OECD Consumption 46.69 47.63 48.80 50.07
Total World Consumption 92.55 94.04 95.33 96.67
Primary Assumptions (percent change from prior year)
World Real Gross Domestic Producta 2.8 2.5 2.1 2.7
Real U.S. Dollar Exchange Rateb 3.8 10.9 5.9 2.5